Cost driver for material handling

SOLUTIONS TO MANAGERIAL ACCOUNTING EXERCISES 13

Solutions to Managerial Accounting Exercises

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Chapter 5: Activity-Based Costing and Management:

Exercise 5-26 Page 201

1. Under a costing system that allocates overhead on the basis of direct-labor hours, the material-handling costs allocated to one lens would be what amount?

Material-handling cost per lens:

$50,000 x 200 = $1,000

[(25x200) ÷ (25x200)]A

A Direct-labor hour’s total number

Therefore, material-handling cost per lens is $1,000

2. Answer the same question a in requirement (1), but for mirrors.

Material-handling cost per mirror:

$50,000 x 200 = $1,000

[(25x200) ÷ (25x200)]A

A Direct-labor hour’s total number

Therefore, material-handling cost per mirror is $1,000

3. Under activity-based costing (ABC), the material-handling activity costs allocated to one lens would be what amount? The cost driver for the material-handling activity is the number of material moves.

Material-handling cost per lens:

[($50,000 ÷ (5 + 15)*)] x 5** = $500

25

Where: * Material moves’ total number

** The lens product line material moves’ number

Therefore, the material-handling cost per lens is $500

4. Answer the same question as in requirement (3), but for mirrors

Material-handling cost per mirror:

[($50,000 ÷ (5 + 15)*)] x 15** = $1,500

25

Where: * Material moves’ total number

** The mirror product line material moves’ number

Exercise 5-27 Page 201

1. Calculate the monthly quality-control cost to be assigned to the Satin Sheen product line under each of the following product-costing systems. (Round to the nearest dollar)

a. Traditional system, which assigns overhead on the basis of direct-labor cost

Quality-control costs = 14.5% x Direct-labor Costs

Quality-control costs assigned to Satin Sheen line = 14.5% x $27,500

= $3,988

b. Activity-based costing

Activity:

Pool Rate:

Quantity for Satin Sheen:

Assigned Cost

Incoming material inspection

$11.50 Per Type

12 Types

$138

In-Process Inspection

0.14 Per Unit

17.500 Units

$2,450

Product Certification

77.00 Per Order

25 Orders

$1,925

Total Quality-Control Costs Assigned

$4,513

2. Does the traditional product-costing system overcost or undercost the Satin Sheen product line with respect to quality-control costs? By what amount?

The traditional product-costing system undercosts Satin Sheen product line with respect to quality-control costs, by $525 = $4,513 - $3,988

Exercise 5-28 Page 202

1. Divide these costs into activity cost pools, and identify a cost driver for assigning each pool of costs to products. Calculate the total cost in each activity cost pool.

Cost Pool 1: Unit-Level I

Raw materials and components 2,950,000 Yen

Inspection 30,000 Yen

Total Cost 2,980,000 Yen

Cost driver for assigning pool 1 is raw-material cost

Cost Pool 2 : Unit-Level I

Depreciation, Machinery 1,400,000 Yen

Electricity, Machinery 120,000 Yen

Equipment Maintenance, Wages 150,000 Yen

Equipment Maintenance, Parts 30,000 Yen

Total Cost 1,700,000 Yen

Cost driver for assigning pool 2 is number of units produced

Cost Pool 3: Batch-Level I

Setup Wages 40,000 Yen

Total Cost 40,000 Yen

Cost driver for assigning pool 3 is number of production runs.

Cost Pool 4: Product-Sustaining Level

Engineering Design 610,000 Yen

Total Cost 610,000 Yen

Cost driver for assigning pool 4 is product parts number

Cost Pool 5: Facility-Level I

Depreciation, Plant 700,000 Yen

Insurance, Plant 600,000 Yen

Electricity, Light 60,000 Yen

Custodial Wages, Plant 40,000 Yen

Property Taxes 120,000 Yen

Natural Gas, Heating 30,000 Yen

Total Cost 1,550,000 Yen

Cost driver for assigning pool 5 include costs allocated towards supporting departments, costs allocated to products, square footage, and number of nits manufactured.

Exercise 5-33 Page 203

The activities of Finger Lakes Winery can be classified as:

U: Unit-level I

B: Batch-level I

P: Product-sustaining-level

F: Facility-level

Activity:

Classification:

(1)

P

(2)

P

(3)

P

(4)

P

(5)

P

(6)

P

(7)

P

(8)

B

(9)

B

(10)

B

(11)

B

(12)

B

(13)

U

(14)

U

(15)

U

(16)

U

(17)

B

(18)

F

(19)

F

Exercise 5-34 Page 204

Choose two activities or accounts from each of the four classifications and explain why you agree or disagree with the ABC project team’s classification.

Carrier Corporation for each of the activity levels the definitions that include:

· Unit: occurs every time a unit is produced. For example utility cost for production equipment. It more often than not relates directly to production volume

· Batch: performed for each batch acquired as well as produced. For example, moving raw materials between the production line and stock room, besides setting-up a machine for a run.

· Product-sustaining: performed towards maintaining product designs, parts, models, and processes. For example, maintaining materials bill, expediting parts and issuing product changes orders. To support key manufacturing capability besides process, sustaining activities are mandatory.

· Facility: performed towards enabling production. Therefore, at the most basic level they are fundamental towards supporting the business entity. For example cleaning and managing the structure.

Without a doubt, these definitions are consistent with those provided in the chapter. An argument for the ABC project team’s classification would be that the activity was characterized by the activity-level classification definition. An argument against the ABC project team’s classification would be that the specific activity did not satisfy the definition. For instance, conveying materials is a batch-level activity for the reason that a raw material should be shifted to the product location whenever a production batch besides run is commenced. Whereas, a facility-level account includes depreciation since plant and equipment correspond to the production facilities provision cost in which manufacturing can occur.

Exercise 5-35 Page 204:

1. Prepare a schedule showing Redwood Company’s total selling cost for each order size and the per-skein selling cost within each order size.

Redwood Company

Selling Costs Computation by Order Size and Skein within Each Order Size

Order Size

Small

Medium

Large

Total

Sales CommissionsA[Unit Cost: $675,000/225,000 = $3.00 Per Box]

$6,000

$135,000

$534,000

$675,000

CatalogsB [Unit Cost: $295,400/590,800 =$0.50 Per Catalog

127,150

105,650

62,600

295,400

Costs of Catalog SalesC [Unit Cost: $105,000/175,000 = $0.60 Per Skein]

47,400

31,200

26,400

105,000

Credit and CollectionD [Unit Cost: $60,000/6,000 = $10 Per Order

4,850

24,150

31,000

60,000

Total Cost Per Order Size

$185,400

$296,000

$854,000

$1,135,400

Units [Skeins] SoldE

103,000

592,000

2,180,000

Unit Cost Per Order SizeE

$1.80

$0.50

$0.30

A Retail Sales in Boxes x Unit Cost:

Small: 2,000 x $3

Medium: 45,000 x $3

Large: 178,000 x $3

B Catalogs Distributed x Unit Cost

C Catalog Sales x Unit Cost

D Number of Retail Orders x Unit Cost

E Small: [2,000 x 12] + 79,000 = 103,000

Medium: [45,000 x 12] + 52,000 = 592,000

Large: [178,000 x 12] + 44,000 = 2,180,000

Total Cost Per Order Size ÷ Units Sold

2. Explain how the analysis of the selling costs for skeins of knitting yarn is likely to impact future pricing and product decisions at Redwood Company.

Selling costs analysis demonstrates that small orders cost more than large orders; which could influence management towards marketing large orders more insistently as well as offering discounts for them.

Chapter 6: Activity-Analysis, Cost Behavior, and Cost Estimation:

Exercise 6-25 Page 259:

1. Use the high-low method to estimate the company’s energy cost behavior and express it in equation form.

The High-low Method:

Variable Cost/Pint = (Energy cost @ High level – Energy Cost/Pint @ Low Level)

(High Level – Low Level)

= (24,100 – 22,100)

(41,000 – 21,000)

= $2,000 ÷ 20,000 Pints Produced = $0.10/Pint

Total Cost @ 41,000 Pints = $24,000

Less Variable Cost @ 41,000 Pints (41,000 x $0.10) = $4,100

Fixed Cost = $20,000

Let:

Y represent Total Energy Cost

X represent Number of pints produced

Y = 0.10X + $20,000

2. Predict the energy cost for a month in which 26,000 pints of applesauce are produced.

Y = 0.10X + $20,000

Y = (0.10 x 26,000) + $20,000 = $22,600

Therefore, the energy cost for a month in which 26,000 pints of applesauce are produced is $22,600

Exercise 6-30 Page 261:

1. Use the high-low method to estimate the variable cost per tour mile traveled and the fixed cost per month.

Variable Cost/tour mile = (12,500 – 11,000)/(20,000 – 8,000)

= 1,500 ÷ 12,000 = 0.125 per tour mile

Total Cost = $12,500

Total Variable Cost = 0.125 x 20,000 = (2,500)

Fixed Cost = 10,000 real

2. Develop a formula to express the cost behavior exhibited by the company’s maintenance cost.

Let Y represent Total cost

Let X represent Tour miles driven

Therefore, Y = 10,000 + 0.125x

3. Predict the level of maintenance cost that would be incurred during a month when 22,000 tour miles are driven. Remember to express your answer in terms of the real).

Using Y = 10,000 + 0.125x

Y = 10,000 + 0.125 x (22,000) = 12,750 real

Therefore, the level of maintenance cost that would be incurred during a month when 22,000 tour miles are driven is 12,750 real

4. Build a spreadsheet: Construct an Excel spreadsheet to solve all of the preceding requirements. Show how the solution will change if the following information changes: in March there were 21,000 miles traveled and the cost was 12,430 real.

The level of maintenance cost could exceed the cost.

Problem 6-35 Page 263:

For each of the cost items described below, choose the graph (see below) that best represents it.

1. Graph (e)

2. Graph (a)

3. Graph (g)

4. Graph (c)

5. Graph (b)

6. Graph (h)

7. Graph (i)

8. Graph (f)

9. Graph (d)

10. Graph (k)

11. Graph (l)

Reference:

Hansen, D.R., & Mowen, M.M. (2017). Managerial accounting (8th ed.). Boulverd Mason, OH: Thomson Higher Education.